Capital markets regulator SEBI has extended the deadline to submit public comments till April 10 on the proposed framework to regulate ESG (environment, social and governance) rating providers.
The regulator had placed a consultation paper for ESG rating providers for securities markets on its website in January, seeking public comments by March 10.
Now, the regulator has decided to extend the timeline for submission of comments to April 10, 2022, according to a notice.
In its consultation paper, SEBI had proposed that credit rating agencies (CRAs) and research analysts with a minimum net worth of Rs 10 crore would be eligible to be accredited as ESG rating providers or ERP.
A listed entity, which intends to avail an ESG rating, needs to obtain the same from only an approved ERP. SEBI had proposed that ERPs should specifically mention the domain to which the product is related. For example, carbon risk ratings should not be referred to as ESG ratings as the products assessing the environmental aspect only.
It, further, proposed that ERPs should offer at least one of the rating products — ESG impact ratings, ESG corporate risk ratings or ESG financial risk ratings and any other ESG related rating products, which may be appropriately labelled.
To avoid any confusion among stakeholders, it had suggested that ERPs should always use proper terminologies for the products offered by them.
Since the activities of ESG rating providers (ERPs) are typically not subject to regulatory oversight at present, increasing reliance on such unregulated ESG rating providers in market securities raises concerns about the potential risks it poses to investor protection, the transparency and efficiency of markets , risk pricing, and capital allocation, among others,” SEBI had noted.
Moreover, the lack of transparency in this area gives rise to the risk of greenwashing and misallocation of assets, which could lead to infirmity in such an ESG rating and a consequent lack of trust thereof. “Therefore, there arises an imperative need, more than ever before, to ensure that the providers of such products operate in a transparent and regulated environment that balances the needs of all stakeholders,” SEBI had said.
It had suggested, to begin with, that SEBI may not standardise rating scales (rating/ scoring symbols and their definitions) at this stage. However, the ERP should be prominently disclosed on its website and in the ESG rating reports, the rating scale (symbols and their definitions) used by it. Additionally, an ERP should ensure consistency in the application of its ESG rating scale.
An ERP should prominently display on its website and in ESG rating reports the type of ESG rating product (whether impact-based or risk-based). It should disclose its rating methodology for all its products on its websites while maintaining a balance for property or confidential aspects of the methodologies.
Regarding the rating process, SEBI had proposed that ERP should follow a proper rating process and ensure consistency in the application of its methodology for the same product (as publicly disclosed) across ESG ratings assigned by it.
Every ERP should have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating.
In addition, each ERP should formulate a detailed policy on managing conflict of interest. Such policy should be prominently disclosed on its website.
SEBI had recommended that ERPs should be mandated to follow a ‘subscriber-pay’ business model. While investors may be the primary source of revenue in a ‘subscriber-pay’ model, a subscriber may include an issuer as well.